Russia's economy

Scratch and sniff

Russia's economic recovery is more fragile than it seems

BY THE dismal standards of the past, it looks splendid. Russia's economy grew by a respectable 5% last year, the budget was balanced, inflation came down and the currency stayed steady. Big cities such as Moscow are visibly booming. There is a stable government, plugging away at needed reforms. Foreign interest is rising, and the main share index has more than doubled since the start of last year.

Good news for the band of financiers peddling Russian stocks and bonds for the past decade. With luck, share prices may even crawl back to where they were in the heady years before crisis, default and devaluation in 1998. Still, a bunch of worries remain.

One is that two temporary factors largely account for the recovery since 1998: a collapse in the value of the rouble and a tripling of the oil price. They brought a windfall to exporters, and gave local manufacturing companies a competitive boost. Because both bits of good fortune have now run out, the economy ground to a halt or even shrank in the fourth quarter of 2001, according to official estimates.

An unusually critical study by the World Bank highlights three problems. One is the failure to diversify. Christof Rühl, the report's author, argues that the Russian economy is overly dominated by large firms, mostly dealing in raw materials. This does not change, because of bureaucratic barriers faced by new businesses, and because no proper banks channel money from rich companies to deserving ones. Rather, spare money goes to chums in other bits of the same empire. Russia needs to emulate resource-rich countries, such as Australia and Norway, which have over time developed broader-based economies. Russia's main claim to future first-world status, its educated workers, counts for little if they do not find productive work.

That touches on the second big problem, low productivity growth. Russia's recovery from the post-Soviet output crunch, using under-employed workers and spare capacity, flattered these figures. Still, Mr Rühl believes that this phenomenon too has run its course. In future, higher productivity means either more investment or better organisation of work.

With isolated exceptions, there is little sign of that happening. This is all the more urgent, because Russian companies now face harsher constraints. Capital has a real cost. The prices of energy and other inputs are rising relentlessly. The tax regime is getting clearer and tougher.

To be fair, reformers in the government are aware of the problem. President Vladimir Putin himself has bewailed the shortage of small businesses—their numbers, according to official statistics, may even be dropping. On paper, recent and planned reforms look like a coherent attempt to create a clear, friendly environment for business. But there is a third problem: implementation.

Under Mr Putin, the political system has become more obedient, and laws whiz through parliament. The hitch is what happens then. Some simple changes, such as lower tax rates, do take effect. But greedy and incompetent bureaucrats are hard to change. One new law limits the number of inspections (by health, hygiene, fire-safety and other officials) that a business may endure. The joke is that, instead of scores of inspections every year, managers will in future have only two—and each will go on for six months.